PacWest Bancorp (NASDAQ:PACW) was hit hard by this year’s regional bank crisis, but many investors are nonetheless curious about buying PACW stock. Most of the curiosity comes from a pending merger deal with another regional bank, Banc of California (NYSE:BANC).
Per the terms of this deal, PACW investors will receive consideration at a premium to the stock’s current trading price (around $7.50 per share). Don’t assume that this is a low or no-risk way to eke out a small gain. Investors buying today could end up losing money.
PACW Stock and the Banc of California Deal
Unlike publicized regional banking blow-ups like Silicon Valley Bank, PacWest avoided a full-on bank failure. However, hit hard by a liquidity crisis of its own, the drastic actions taken to avoid such a fate had a massive impact on its share price.
From February 2022, through May 2023, PACW stock sank from over $50 to as low as $2.48 per share. The stock bounced back during May and June, when it became clear that PacWest wasn’t the next Silicon Valley Bank. In July, the company’s shares briefly re-hit prices above $10 per share.
However, the stock quickly slid back, when Banc of America and PacWest announced their merger plans on July 25.
While the press release announcing the deal touted how this merger would create a stronger, more profitable bank, investors likely bailed on the stock, as the deal terms (0.6569 shares of BANC for each PACW share) represented a discount to PACW’s closing price the preceding trading day.
Since then, though, subsequent share price movements have resulted in PACW moving to a price that’s at a 4.3% discount to the BANC offer. Again, this is a merger arbitrage opportunity, but one that most investors should skip on.
A Bad Trade, and an Even Worse Investment
Buying PACW stock as a merger arbitrage play is a trade where downside risk exceeds upside potential. PACW’s share price has moved lower since the deal announcement, and so too has the BANC stock price.
Given that both stocks could be vulnerable to further share price declines between now, and when the deal is expected to close (either late this year, or early next year), you’ll need to short BANC to lock-in this tiny gain.
Otherwise, the BANC shares you receive a few months from now could be worth less than the PACW shares you decide to buy today.
Even if you execute this trade like an experienced arbitrageur (going long PACW, short BANC), this trade could still blow up.
Other arbs have made the same trade, and if Banc of California decides to back out of the deal (not highly likely, but possible), PACW would likely drop, while BANC rises, putting you in a squeeze.
As hinted above, buying PACW, as an indirect way to enter a position in Banc of California post merger, isn’t a great idea either. In fact, it may be an even worse investment idea, as a closer look suggests.
The Verdict
Right now, the situation with PACW/BANC appears more likely to worsen from here, rather than improve.
What caused the regional banking crisis has yet to ease. Interest rates keep moving higher, reducing the value of existing bank assets like loans and fixed-income securities.
The commercial real estate crisis could mean more troubles ahead for regional banks like Banc of California.
Add it all up, and it’s clear why analyst forecasts for 2024 earnings vary widely. BANC believes its annual earnings will come in between $1.65 and $1.80 per share next year. Sell-side forecasts range from a loss of 21 cents per share, and earnings of $1.74 per share.
Not worthwhile as a merger arbitrage trade, and too risky as a buy, your best move is to stay away from PACW stock completely.
PACW stock earns an F rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.